What will be the impact of the agreement between Brazil and China to ditch the dollar

By Raquel Hoshino

Even without President Luiz Inácio Lula da Silva (PT), who was recovering from pneumonia, and only this Tuesday (11) traveled to the Asian country, the Brazilian delegation in China weaved in late March an agreement.

It will allow bilateral transactions between the two countries to occur directly in the Brazilian currency, the real, and the Chinese currency, the yuan, without going through the dollar.

Announced on March 29, during the Brazil-China Economic Seminar in Beijing, the agreement still lacks details (which should be made official during Lula’s trip to China).

According to Leonardo Paz, a researcher at the Center for Prospection and International Intelligence of the Getúlio Vargas Foundation (FGV), “this type of mechanism is only minimally efficient when you have a robust bilateral trade flow, coming and going” of billions of dollars, and over many years.

International relations professor at the Brazilian Institute of Capital Markets (Ibmec) Carlo Cauti recalled that an agreement like this “has already been tried in the past, and it didn’t work out.”

He recalled that in 2009, Lula tried a similar agreement in his second mandate.

“We are in 2023, and the transactions are still in dollars,” the specialist pointed out.

For him, what happened in the past can be a preview of what will happen with this new agreement.

As Brazil is the only “large country with a trade surplus” concerning China, it would have to convince exporters to accept the Chinese currency as payment.

Since it “is not a convertible currency,” and there would be no certainty of maintaining the stability of the yuan exchange rate “since it has been manipulated for decades, forever, by the Chinese government, it is very difficult to convince these companies to accept payment in yuan.”

For the professor, the Brazilian exporting companies “will want dollars because they will have to buy international inputs, which are fundamental for their production, from fertilizer to the cattle vaccine, even the Petrobras instruments to produce petroleum.”

“They are quoted in dollars.”

As this also has an exchange cost, the professor believes “it is very difficult for this agreement to be implemented.”

ADVANTAGES OF THE AGREEMENT

Since 2009, China has been Brazil’s largest trading partner and one of the main sources of investment in the country.

According to figures from the Brazilian Trade and Investment Promotion Agency (ApexBrasil), in 2022, the volume of transactions was a record, reaching US$150 billion, US$89.7 billion in Brazilian exports, and US$60.7 billion in imports.

In business with China, Brazil has a surplus of US$29 billion, selling especially commodities to the Asian country.

In 2021, China was Brazil’s eighth largest global investor and the first in Asia, ahead of Japan, South Korea, and India.

The clearest advantage for Brazil at the moment refers to the exchange rate.

The more currency exchanges in a transaction, the greater the tax payments and exchange losses.

“If you can link your payments to another currency, you avoid doing these conversions. You lose less money in these various frictions,” said researcher Leonardo Paz.

“In the case of Brazil gradually approaching China, by making this type of agreement, it creates an institutional goodwill so that you can eventually deepen this process in other areas.”

In his view, there would still be a possibility of “creating a series of export and import support policies” because “one of the public export support policies is to create bands, or to create differentiated exchange rate mechanisms.”

This could give the possibility, for example, of the Brazilian government favoring a sector that it wants to leverage, offering it a cheaper exchange rate to import cheaper parts.

For Cauti, China gains global influence with this type of agreement.

“If Brazil begins to have international reserves no longer in dollars, but in yuan, it is obvious that everything that happens in China and with China will have a direct influence in Brazil,” he warned.

He cites the possibility of a “direct dependence on China,” “much more than today.”

REASONS FOR THE AGREEMENT

For both specialists, two factors would have motivated China to make agreements like the one it is making with Brazil and other countries:

• the possibility of an invasion of Taiwan (according to forecasts, in a horizon of five to 15 years),
• and to reduce its dependence on dollars.

In the case of a conflict with Taiwan, depending less on American currency would mean China not being so vulnerable to international sanctions, such as those Russia has been experiencing since it invaded Ukraine.

“It will armor itself both economically and politically, a dependence on a currency that today is supposed to be the currency of the country that is her main strategic rival,” Leonardo Paz said.

Another factor that may have motivated China to seek these agreements was that its trade was greatly impacted by the 2008 international crisis, having difficulty accessing the dollar in the international market via its companies to be able to make transactions.

By not needing so much of the American currency (which has been a global trend, according to Paz), the Asian country “is being shielded from international shortages in certain sectors that it considers strategic to the country.

The United States, on the other hand, would suffer, according to Carlo Cauti.

“The Americans would lose a little more power, in terms of influence, because they don’t decide where the dollar goes or doesn’t go.”

“They simply print the dollar.”

“But it would certainly reduce the influence of the United States.”

“Also, for example, it could prevent international sanctions against companies that do business with countries under US sanctions.”

“There would also be a reduction of “American influence and the ability of Americans to have so-called ‘soft power,'” he added.

With information from Gazeta do Povo